Spotlight 9 March 2018 Investment funds have found a new cash cow: social housing With councils unable to pay for new social housing, private investors are moving in. SHUTTERSTOCK / I WEI HUANG Sign UpGet the New Statesman\'s Morning Call email. Sign-up Civitas Social Housing PLC launched on the stock market in November 2016, making social housing a formal investment opportunity for private investors. To date, the fund has invested around £400m of equity in social housing in 101 local authority areas, covering roughly 2,500 tenants. “We wanted to build a public fund that was evergreen, and would provide long-term equity to the [social housing] sector,” says chief executive Paul Bridge. “There’s an enormous demand for social housing that’s been unmet.” Social housing is let on a secure basis, at low rents, to those struggling to meet housing costs. Registered providers of social housing are usually local authorities or housing associations, which are regulated and receive funding from the Ministry of Housing, Communities and Local Government. The National Housing Federation blames heavy cuts to grants for social landlords, in part, for the housing crisis. Pledged government capital for these homes has fallen from £11.4bn in 2009 to just £5.3bn in 2015. In 2016, 37,985 “affordable” homes were built, compared to 53,917 in 2009. At the end of last year, over a million people were on waiting lists for this type of housing. The funding gap has created a unique market opportunity for investment funds. Through this process, a fund will buy the land and the homes on it from the local authority or housing association, leasing the properties back to them. The registered provider continues to manage the property interface, including administration, rent collection, upkeep and so on. Revenue is raised directly through rents on the properties. Civitas promises investors a five per cent return per annum. Although this is a modest dividend, it is highly secure. “This [investment] is safe and ethical; [it] isn’t a high-return vehicle; it’s about longevity of income,” explains Bridge. John Butler, policy leader at the National Housing Federation, says that “housing associations are seen by investors as safe, secure investments with assured returns and a zero default record.” It may be a safe bet for investors, but is it a secure way for registered providers to raise capital? “It is for individual housing associations to assess the risks associated with any new types of funding they take on. These will be bilateral contracts between any organisation that enters into this funding arrangement and the investor,” maintains Butler. The terms contained within those bilateral contracts are unknown, but will inevitably have a fundamental effect on the provider-investor relationship in future. The Civitas business model is centred on long-term investment. Its focus is housing vulnerable residents with particular needs, such as learning difficulties or dependency issues. “That’s why we sign a long-term lease. Yes we are a fund, but we’re housing people that are vulnerable. They need long-term security,” says Bridge. However, like any market player, the funds are not immune to its forces. What if they had to back out of a project? “If the property couldn’t be let, we would have to let it to other client groups,” he admits. “But we really think that won’t happen.” When questioned about guarantees for investors, how revenue was raised, and what would happen if the returns weren’t high enough, the National Housing Federation admitted they were “not sure” on these points, and advised that we ask a fund instead. Butler conceded, however, that overall state investment would be preferable. “Increased levels of state funding in the form of social housing grants would provide more stability for the sector and would lead to higher levels of development.” Following the example set by Civitas, social housing investment fund Residential Secure Income plc (ReSI) floated on the stock exchange in June 2017, raising £180m in its initial public offering. Joint chief executive of TradeRisks Jon Slater, the umbrella company that manages the fund, says ReSI is helping to plug a capital hole for registered providers under pressure to build homes. “Until recently there have been very limited ways for private sector capital to participate in the opportunity.” ReSI claims, like Civitas, to be in this for the long haul. “ReSI aims to hold properties indefinitely rather than attempting to realise capital gains through a sales strategy,” says Slater. And what if the returns aren’t enough? “There is no recourse back to the registered provider if the investment does not meet our initial assumptions,” he insists. “We aim to mitigate our risks across the portfolio by having a large and diversified mix of exposures.” This aim does not provide the same assurance as state funds. Professor Christine Whitehead from the London School of Economics says that state funding in the form of a grant is “obviously” more secure, but points out that government could modify the terms of repayment, creating a “different form of uncertainty” that could affect investors. And what if investment firms don’t make adequate returns on a project? “They move out,” she says simply, suggesting that a firm would back out of a project. The lack of funding that helped to foster this new relationship has been criticised across the political spectrum. Sajid Javid, Secretary of State for Housing, broke away from his own party to call on Philip Hammond to borrow more money to invest in new affordable homes, stating that “without affordable, secure, safe housing we risk creating a rootless generation, drifting from one short-term tenancy to the next.” Housing associations and local authorities are facing a dilemma, Butler points out. “In 2010 the government decided to halt funds to social rent. The current government has announced an ambition of building 300,000 new homes a year. We share this ambition, but [housing associations] need the funding to match.” Registered providers need capital to build homes, and funds like Civitas are offering it. The combination of private investment and social housing poses a PR challenge. “There’s a lot of headline risk in [the possible story of] people being thrown out of their homes to fund City investors,” says Andrew Summers, head of fund research at Investec Wealth, which holds nearly 20 per cent of the shares in Civitas. So far only a handful of funds have a this focus, but Bridge reckons there is plenty of interest. “There are 1500 housing associations to partner up with, and there’s a lot of need, so I think there’s room for lots more funds.” As the housing crisis rages on, and government funding remains elusive, registered providers will pursue various routes that enable them to build the homes that are so desperately needed. As such, Civitas will continue to explore this surprising market niche. “We want to work in every local authority in England and Wales.” › The leasehold system is an industrial-scale rip-off Augusta Riddy is a Special Projects Writer at the New Statesman. 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